Free Guide to 1031 Exchanges

Financial Benefits of a 1031 Tax Deferred Exchange

A 1031 Tax Deferred Exchange allows investors to exchange one property for another without paying capital gains taxes. There are many financial benefits to using a 1031 Exchange, including saving money which can be used to invest in more valuable properties, allowing investors to diversify their investments, and continually growing your assets without ever incurring capital gains taxes.

A 1031 Tax Deferred Exchange is a tool used by real estate investors and business owners to defer paying capital gains taxes on the sale of their properties. The provision set forth in Section 1031 of the IRS code allows business owners to reinvest the proceeds from the sale of one property into another property. There are several financial benefits to taking advantage of a 1031 Tax Deferred Exchange.

The most obvious benefit of a 1031 Exchange is the money you save on capital gains taxes. More money in your pocket is always a good thing. The thing that makes saving money such a desirable thing in this case is that you can use the extra money to reinvest in a more valuable property than the property you sold initially. There is no limit to the number of times you can exchange properties which means that you can continue to sell properties and reinvest the money in better properties. In this manner you can continue to grow your assets while deferring tax payments indefinitely.

Another benefit of a 1031 Tax Deferred Exchange is that it allows you to diversify your investments. The tax code pertaining to a 1031 Exchange requires property owners to use the proceeds of the sale of their property to purchase "like-kind" property. The way this works in your favor is that the IRS has a very broad definition of "like-kind" properties, and when performing a 1031 Exchange you can sell one property and purchase more than one like-kind property with the proceeds of the sale. So, for instance, if you sell one business property, you can reinvest the profits from the sale in a rental property, a piece of land, and a small business.

On the other side of the coin of diversification is consolidation. For some investors, the ability to sell several small properties and use a 1031 Exchange to purchase one or two larger properties can be a huge benefit. The larger businesses may bring in more cash than several small businesses combined. Also, having only one business to manage, rather than several small businesses to run, can save investors money and time.

Finally, if you plan properly, you can use 1031 Tax Deferred Exchanges to continually defer capital gains taxes while growing your assets indefinitely. Depending on the value of all your assets, you may even be able to make provisions when planning your estate to pass these properties on to your heirs or to a charitable organization without ever incurring any capital gains taxes.